May 2022 Market Commentary and Economic Outlook
The expert team at Infrastructure Capital Advisors provides key insights and advice on current market conditions and economic outlook for May 2022 and the coming months. Review below but be sure to register to join our May Webinar where Jay Hatfield reviews this executive summary and provides deeper and more up-to-date insights for April and coming months.
We expect 2022 economic growth to slow dramatically into the 1-3% range due to erratic and very hawkish monetary policy. We do not expect a recession in 2022/23 due to a very resilient housing sector with an ongoing shortage of housing and tail winds from the enormous US energy cost advantage.
We believe that the stopping point for the Fed Funds rate is more important than the speed of rate hikes. We expect the Fed to pause at the neutral rate of 2.5% as inflation starts to decline in the second half of 2022 due to peaking energy prices and slowing housing and rent price increases.
The ratio of households to houses is approximately 110% which is below the average for the last 50 years and well below the peak of 120% reached during the financial crisis. In addition, the total inventory of houses for sale is at an all-time low of 1.3MM units vs 4.5MM homes for sale at the peak of the financial crisis.
Stock Market Outlook:
We continue to believe that 2022 will be a difficult year for stocks with the S&P likely to be down 10-20% for the year depending on the path of long-term interest rates and the path of Fed policy tightening. We are focusing on diversification and sectors that will benefit during periods of rising interest rates and inflation.
Our models show that the S&P is approximately fairly valued at 4,300 based on the current 10-year interest rate of 2.90%. But if the 10-year rises to 4.0%, fair value on the S&P would drop by over 15% to 3,600.
Most large capitalization stocks, including tech stocks, have similar duration and sensitivity to changes in interest rates with a .5% treasury rate increase lowering the theoretical value of a typical stock by approximately 10%. We believe covered call writing strategies are likely to outperform during this difficult year.
We expect that 10-year treasury bonds will find a bottom in the 3% yield area, which should help stabilize the stock market
The Federal Government has indicated that spending will be down approximately $2 trillion in 2022 relative to 2021; historically, the yield curve tends to flatten during Fed tightening cycles. There are also approximately $52 trillion of global pension assets and only 28% are allocated to bonds.
Global growth and demand for credit is likely to be sluggish in Europe as a result of the energy crisis in China in response to regulatory crackdowns and in the US due to hawkish Fed policy.
We expect oil to trade in the $100-120 range, with the Ukrainian war and strong demand for international travel adding over 3MM barrels of incremental demand.
Europe’s disastrous energy policy has resulted in a US cost advantage of almost 80% for gas and electricity. This unprecedented energy cost advantage will cause a boom in US energy, chemicals, metals, fertilizer and other manufacturing industries.
It is not possible for the US to stop using hydrocarbons as wind and solar only represent 4% of US energy production and are extremely difficult to expand rapidly as siting/NIMBY issues are huge barriers to expansion.
$95 billion per month of quantitative tightening in the second half of the year will be a significant headwind for stocks- particularly high-risk tech stocks and cryptocurrencies. We continue to focus on diversification and asset allocations to defensive dividend stocks such as utilities, telecom services, pipelines, consumer staples and preferred stocks with significant dividends.
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Infrastructure Capital Advisors, LLC (ICA) is an SEC-registered investment advisor that manages exchange traded funds (ETFs) and a series of hedge funds. The firm was formed in 2012 and is based in New York City. ICA seeks current income opportunities as a primary objective in most, but not all, of ICA's investing activities.
Not for distribution to the public. Opinions represented above are subject to change and should not be considered investment advice. Past performance is not indicative of future results. The links to the fund fact sheets will provide standardized performance and risk disclosures.
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ICAP Exchange Traded Funds (ETF): Investing involves risk, including possible loss of principal. An investment in the Fund may be subject to risks which include, among others, investing in equities securities, dividend paying securities, utilities, small-, mid- and large-capitalization companies, real estate investment trusts, master limited partnerships, foreign investments and emerging, debt securities, depositary receipts, market events, operational, high portfolio turnover, trading issues, active management, fund shares trading, premium/discount risk and liquidity of fund shares, which may make these investments volatile in price. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and Medium-capitalization companies, foreign investments and high yielding equity and debt securities may be subject to elevated risks. The Fund is a recently organized investment company with no operating history. Please see prospectus for discussion of risks. Distributor, Quasar Distributors, LLC
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PFFR Exchange-Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. Preferred Stocks: Preferred stocks may decline in price, fail to pay dividends, or be illiquid. Real Estate Investments: The Fund may be negatively affected by factors specific to the real estate market, including interest rates, leverage, property, and management. Industry/Sector Concentration: A Fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated Fund. Passive Strategy/Index Risk: A passive investment strategy seeking to track the performance of the underlying index may result in the Fund holding securities regardless of market conditions or their current or projected performance. This could cause the Fund’s returns to be lower than if the Fund employed an active strategy. Correlation to Index: The performance of the Fund and its index may vary somewhat due to factors such as Fund flows, transaction costs, and timing differences associated with additions to and deletions from its index. Market Volatility: Securities in the Fund may go up or down in response to the prospects of individual companies and general economic conditions. Price changes may be short or long term. Prospectus: For additional information on risks, please see the Fund’s prospectus.
AMZA Exchange Traded Funds (ETF): The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities. MLP Interest Rates: As yield-based investments, MLPs carry interest rate risk and may underperform in rising interest rate environments. Additionally, when investors have heightened fears about the economy, the risk spread between MLPs and competing investment options can widen, which may have an adverse effect on the stock price of MLPs. Rising interest rates may increase the potential cost of MLPs financing projects or cost of operations, and may affect the demand for MLP investments, either of which may result in lower performance by or distributions from the Fund’s MLP investments. Industry/Sector Concentration: A fund that focuses its investments in a particular industry or sector will be more sensitive to conditions that affect that industry or sector than a non-concentrated fund. Short Sales: The Fund may engage in short sales, and may experience a loss if the price of a borrowed security increases before the date on which the Fund replaces the security. Leverage: When a Fund leverages its portfolio, the value of its shares may be more volatile and all other risks may be compounded. Derivatives: Investments in derivatives such as futures, options, forwards, and swaps may increase volatility or cause a loss greater than the principal investment. MLPs: Investments in Master Limited Partnerships may be adversely impacted by tax law changes, regulation, or factors affecting underlying assets. No Guarantee: There is no guarantee that the portfolio will meet its objective. Performance Data: Performance data quoted backtested results. Backtested Performance was derived from the retroactive application of a model developed with the benefit of hindsight. Backtested performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so your shares, when redeemed, may be worth more or less than their original cost. Please visit https://www.virtus.com/products/virtus-infracap-us-preferred-stock-etf#shareclass.742/period.quarterly for performance data current to the most recent month-end and the Fund’s standard performance information. You should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. For PFFA, PFFR, and AMZA funds, contact VP Distributors LLC at 1-888-383-4184 or visit www.virtusetfs.com to obtain a prospectus which contains this and other information about the Fund. The prospectus should be read carefully before investing.
Virtus ETF Advisers, LLC serves as the investment advisor and Infrastructure Capital Advisors, LLC serves as the subadviser to PFFA, PFFR and AMZA. These three funds are distributed by VP Distributors, LLC, member FINRA and subsidiary of Virtus Investment Partners, Inc.
Past performance is not indicative of future results.
The links to the fund fact sheets will provide standardized performance and risk disclosures.
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